ARBITRATION AGREEMENT, ESSENTIALS, AND LAW OF SEVERABILITY

This article is written by Ayushi Mahawar, an intern under Legal Vidhiya

ABSTRACT

This research paper delves into the significance of arbitration agreements and the doctrine of severability in modern commercial dispute resolution. It highlights the necessity of Alternative Dispute Resolution (ADR) mechanisms like arbitration to expedite the resolution of disputes outside the court system. Arbitration, governed by the Arbitration and Conciliation Act of 1996 in India, offers a private and efficient means of settling conflicts between parties. The paper outlines the essentials of an arbitration agreement, emphasizing the requirement for a written agreement, mutual consent, voluntary agreement, legal capacity, and signatures from all parties. It discusses the advantages of arbitration agreements along with the disadvantages. Furthermore, the paper explores the doctrine of severability, which ensures the enforceability of arbitration clauses independent of the main contract. It discusses the application of the doctrine, particularly in international contexts, and its significance in promoting party autonomy and stability in dispute resolution. Overall, the research underscores the critical role of arbitration agreements and severability in facilitating efficient and fair dispute resolution processes, particularly in the global business arena.

KEYWORDS

Arbitration agreements, Arbitration and Conciliation Act, Alternative Dispute Resolution (ADR), Doctrine of severability, Arbitration clause, International arbitration, and Party autonomy.

INTRODUCTION

In today’s fast-paced commercial world, disputes often arise between parties, and both parties suffer losses if they become the subject of complex court battles. Alternative Dispute Resolution (ADR) mechanisms have been developed to simplify and ease the resolution of these disputes. Arbitration is a way of settling conflicts between parties without resorting to court. Arbitration means the dispute settlement by a third party’s judgment called arbitrator without recourse to the court of law. The conflicts which can be settled without going to a court come under the ambit of arbitration. Arbitration is governed under the Arbitration and Conciliation Act, of 1996, and it extends to the whole of India. Indian courts are overburdened with the multiplicity of cases of various grounds amongst various parties, and they can’t bear the whole burden. Thus, there is an urgent need to shift gradually to some other mode of dispute resolution[1]. The purpose of the Arbitration Act is to provide speedy redressal to disputes through private arbitration. Arbitration is an alternative conflict resolution method in which parties resolve their disputes without going to court. An arbitrator, an unbiased third party, is appointed to hear the case and make a decision. The meeting takes place outside of court, similar to a hearing, with both parties providing testimony and evidence. The decision of the arbitrator is almost always final, and the courts will rarely reconsider the matter[2].

ARBITRATION AGREEMENT

Section 7 of the Arbitration and Conciliation Act, 1966, has provided the following definition for Arbitration Agreement: – “…arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”[3] In simple terms, it signifies an agreement among parties involved in a legal relationship to settle their disagreements through arbitration instead of resorting to litigation in a court. These disagreements include existing disputes and those anticipated upon entering the legal relationship. The legal relationship doesn’t need to arise exclusively from a contract. The Section also states that the agreement must be ‘written’, which can mean a document signed by the parties, an exchange of letters, telex, telegrams, or other means of telecommunication [including electronic communication] that provide a record of the agreement, or an exchange of statements of claim and defense in which one party alleges the existence of the agreement and the other does not deny it. Section 7(2) of Arbitration Clauses states that an arbitration agreement can take the form of either an arbitration clause within a contract or a distinct agreement. A separate agreement is exclusively focused on outlining the terms and conditions of arbitration, agreed upon by both parties. Conversely, an arbitration clause offers a more convenient way to enter an arbitration agreement, where parties simply include a clause in their contract expressing their intention to resolve future disputes through arbitration rather than through the court system[4]. For example, an arbitration clause in a contract might state: “Any dispute or disagreement arising between the parties concerning the interpretation, scope, implementation, or consequences of this contract, its validity, or any breach thereof, shall be settled by arbitration by the Rules of Arbitration of the Indian Council of Arbitration, and the resulting decision shall be binding on both parties.” When creating an arbitration agreement, whether through a separate agreement or a clause, parties have the freedom to determine the number of arbitrators and the location of arbitration. Options include selecting a single arbitrator, appointing three arbitrators with each party choosing one or the two selected arbitrators then selecting a presiding arbitrator or any other odd number of arbitrators. Furthermore, it’s essential to clearly define the scope and subject matter of the arbitration to avoid ambiguity or uncertainty when disputes arise in the future, while also providing the arbitrator with explicit authority to address the dispute. Before arbitration proceedings can commence, the involved parties must have consented to arbitration for the dispute. Arbitration agreements are typically established at the outset of a business relationship, often long before any disagreement arises. In some cases, parties in a dispute may agree to arbitration after the conflict has emerged, or even after legal proceedings have been initiated.

ESSENTIALS OF AN ARBITRATION AGREEMENT

An arbitration agreement must meet many fundamental conditions to be considered legitimate and effective. These conditions ensure that the agreement fulfils its objective and guides the arbitration process fairly.

1- Presence of a dispute- A prerequisite for the enforcement of an arbitration agreement is the presence of a dispute between the parties. This is an essential prerequisite for the agreement to take effect. If there is no disagreement, the arbitration clause cannot be utilized to challenge a previously agreed-upon settlement.

2- Written Agreement[5]– Every arbitration agreement must be established in writing. A written agreement can take many different forms:

Documents with Signatures: When both parties sign the paper, the agreement is legitimate.

Written Communications: Communications such as telex, letters, or telegrams that document the agreement for arbitration are deemed sufficient.

Exchange of Statements: When parties exchange statements stating their claims and defenses, and one party accepts the existence of an arbitration agreement and the other party does not contest it, the agreement is considered genuine.

3- Intent of the Parties- The shared intention of the involved parties is a pivotal aspect of the agreement. While specific terms like “arbitrator” or “arbitration” need not be expressly stated, the mutual intent of both parties to adhere to the terms of the arbitration agreement is crucial. The validity of the agreement depends on the collective intention to utilize arbitration for dispute resolution.

4- Voluntary Agreement- For an arbitration agreement to be considered valid, it must arise from the parties’ voluntary and freely given consent. The presence of coercion, fraud, or undue influence should not compromise the integrity of the agreement, ensuring that parties opt for arbitration as their preferred method of resolving disputes.

5- Mutual Consent- All involved parties must agree to resolve their disputes through arbitration, demonstrating a clear indication of mutual acceptance and intent to engage in the arbitration process. Without the explicit consent of all parties, the arbitration agreement cannot be upheld.

6- Legal Capacity- Every party involved in an arbitration agreement must possess the legal capacity to enter into such an agreement. Minors, individuals lacking mental capacity, or those acting under duress may not have the legal capacity to form a valid arbitration agreement.

7- Signatures from the Parties[6]– The signatures of the parties are essential in establishing a valid arbitration agreement. There are two possible scenarios:

Mutual Signatures: The agreement is a document signed by both parties, which sets out all terms and conditions.

Unilateral Signature: Alternatively, one party may sign the document containing the terms, and the other party can indicate acceptance. In this situation, the agreement becomes valid upon acceptance.

8- Form of arbitration- An arbitration agreement might take the form of an arbitration clause inside a contract or a separate agreement.

9- A valid contract- The agreement must meet all of the requirements of a legal contract as outlined in Section 10 of the Indian Contract Act, 1872. The parties must be major, of sound mind, not legally disqualified, consenting freely, and acting for lawful object and consideration.

ADVANTAGES OF AN ARBITRATION AGREEMENT

1. Arbitration proceedings generally are quicker and incur lower costs compared to litigation in court.
2. Arbitration proceedings are conducted confidentially, so you will not be required to testify publicly. The specifics of your disagreement will not appear in public court records.
3. You can choose who will resolve your case through arbitration. This is especially useful if you want a decision-maker with specific technical expertise or experience in your sector[7].

DISADVANTAGES OF AN ARBITRATION AGREEMENT

1. Arbitration awards cannot be appealed. You must accept the arbitrator’s ruling as final.
2. You cannot hold a jury trial. This can lead to a worse outcome in an employment dispute because jurors are frequently sympathetic to employees.
3. Arbitration limits the parties’ ability to communicate information. This might make it difficult to construct your case in an employment arbitration or any other circumstance in which the other side possesses the majority of the information and documentation[8].

Arbitration’s growth represents a fundamental shift in our legislative approach. Another benefit is the capacity to address concerns in a much shorter amount of time, as well as the numerous or independent terms included in the commercial contract. These are paving the way for the most effective and suitable solution that avoids the need for court involvement. Arbitration is sometimes the most effective method of settling disputes between parties since it does not need the Court to go through long procedures to provide findings. It is affordable, time-saving, and allows individuals to choose their arbitrators. This guarantees that decisions are made swiftly and, depending on the circumstances, are generally acceptable.

MMTC Ltd. vs Sterlite Industries (India) Ltd.[9]: Section 10 of the Act gives parties the freedom to decide the number of arbitrators. This is an important element for the working of the arbitration agreement to ensure that there would be no chances of a tie in the decision-making. However, even if an even number of arbitrators is chosen, the arbitration agreement remains valid.

LAW OF SEVERABILITY

The “Doctrine of Severability,” also known as the “Autonomy of the Arbitration Clause,” emphasizes that the arbitration clause within a contract stands apart from the main contract itself. Consequently, even if the main contract is deemed invalid, breached, or terminated, the arbitration clause remains valid and enforceable. This doctrine underscores the independence of an arbitration clause from the overarching contract. It ensures that in cases where one party alleges a complete breach of the contract by the other party, the contract does not dissolve entirely; instead, it survives for adjudicating claims arising from the breach and determining the method of resolution.

The application of the doctrine of severability in arbitration has varied across different courts, and its history has been marked by fluctuations. Before the enactment of the Arbitration and Conciliation Act, 1996, cases such as ‘Union of India vs Kishorilal Gupta and Bros’, 1959, held that “an arbitration agreement was an integral part of the underlying contract and would cease to exist if the main contract ceased to exist due to non-conclusion or being void ab initio.” The ‘principle of severability’ came into existence after the 1996 Act under Section 16 after which issues relating to this principle were determined by the courts. Section 16(1) of the Arbitration and Conciliation Act, 1996, addresses the concept of “severability” and states that an arbitration clause forming part of a larger contract is to be treated as an independent agreement distinct from other terms of the contract. Moreover, a determination by the arbitral tribunal that the contract is null and void does not render the arbitration clause invalid by operation of law[10].

The rule of severability holds particular significance in international contexts, especially in scenarios where parties from different jurisdictions have entered into contracts containing arbitration clauses. The doctrine of separability ensures that disputes can proceed to arbitration even if there are conflicts regarding substantive aspects of the main contract.

This principle of severability is widely recognized and applicable in international law, particularly in the realm of international trade and participation agreements. It is reflected in various international arbitration rules and guidelines, such as those established by the International Chamber of Commerce (ICC), the United Nations Commission on International Trade Law (UNCITRAL), and other arbitral institutions.

Article 16(1) of the UNCITRAL Model Law of 1985 on International Commercial Arbitration defines the concept of severability, stating that the arbitral tribunal has the authority to decide on its jurisdiction and to resolve any disputes arising from the arbitration agreement, including challenges to the agreement’s validity.[11] An arbitration provision within a contract is considered distinct from other provisions for this purpose.

The application of the rule of severability may vary depending on the specific laws and legal frameworks of the relevant jurisdictions involved in an international arrangement. The benefits of arbitration agreements can vary based on the specific circumstances or preferences of the parties involved. However, it’s essential to consider potential disadvantages before agreeing to such provisions. Arbitration clauses mandate that parties resolve their disputes through arbitration rather than litigation in court. The rule of severability further reinforces arbitration agreements by treating them as independent from the underlying contract. This principle ensures that challenges to the validity of the main contract do not automatically invalidate the arbitration clause, thereby promoting party autonomy and stability in international dealings[12].

CONCLUSION

In conclusion, this research paper has underscored the critical importance of arbitration agreements and the doctrine of severability in modern commercial dispute resolution. As outlined, arbitration serves as a vital Alternative Dispute Resolution (ADR) mechanism, offering parties a private, efficient, and often more expedient means of settling conflicts outside of the court system. Governed by statutes such as the Arbitration and Conciliation Act, 1996 in India, arbitration agreements provide a framework for parties to resolve disputes through a neutral arbitrator’s judgment. The essentials of an arbitration agreement, including the requirement for a written agreement, mutual consent, voluntary agreement, legal capacity, and signatures from all parties, have been meticulously detailed. Additionally, the advantages and disadvantages of arbitration agreements have been examined, acknowledging both the efficiency and finality of arbitration awards alongside limitations such as the inability to appeal and limited information exchange. Furthermore, the paper delved into the doctrine of severability, highlighting its significance in ensuring the enforceability of arbitration clauses independent of the main contract. The doctrine promotes party autonomy and stability in dispute resolution, particularly in international contexts where conflicts may arise regarding substantive aspects of the main contract. Drawing upon case law and international legal frameworks, the research demonstrates the widespread recognition and application of the rule of severability, affirming its relevance in facilitating effective dispute resolution. Overall, the research emphasizes the pivotal role of arbitration agreements and the doctrine of severability in fostering efficient, fair, and stable dispute resolution processes, particularly in the dynamic landscape of global business transactions. As businesses continue to navigate complex commercial relationships, the utilization of arbitration agreements coupled with a robust understanding of the doctrine of severability remains indispensable for achieving timely and equitable resolutions to disputes.

REFERENCES

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3. Arbitration and Conciliation Act, 1996, § 7, available at https://indiankanoon.org/doc/1846895/ (last visited Feb. 5, 2024).   
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[1] iPleaders Blog, https://blog.ipleaders.in/what-is-arbitration/ (last visited Feb. 2, 2024).

[2] Legal Dictionary, https://legaldictionary.net/arbitration/ (last visited Feb. 2, 2024).

[3] Arbitration and Conciliation Act, 1996, § 7, available at https://indiankanoon.org/doc/1846895/ (last visited Feb. 5, 2024).   

[4] Arbitration and Conciliation Act, 1996, § 7, available at https://indiankanoon.org/doc/1846895/ (last visited Feb. 5, 2024).   

[5] LawBhoomi, https://lawbhoomi.com/essentials-of-arbitration-agreement/#Attributes_of_Arbitration_Agreement (last visited on Feb. 2, 2024).

[6] LawBhoomi, https://lawbhoomi.com/essentials-of-arbitration-agreement/#Attributes_of_Arbitration_Agreement (last visited on Feb. 2, 2024).

[7] LegalZoom, https://www.legalzoom.com/articles/what-is-an-arbitration-agreement (last visited Feb. 2, 2024).

[8] LegalZoom, https://www.legalzoom.com/articles/what-is-an-arbitration-agreement (last visited Feb. 2, 2024).

[9] WritingLaw, https://www.writinglaw.com/arbitration-agreement/#essentials (last visited Feb. 5, 2024).

[10] iPleaders Blog, https://blog.ipleaders.in/revisiting-the-principle-of-severability-in-arbitration-law/#Essential_elements_of_an_Arbitration_agreement (last visited Feb. 5, 2024).

[11] Trans-lex.org, https://www.trans-lex.org/450910/_/uncitral-model-law-on-international-commercial-arbitration-with-amendments-2006/#head_22 (last visited Feb. 2, 2024).

[12] awesome-gpt.com, https://awesome-gpt.com/essentials-of-arbitration-agreement-in-india (last visited Feb. 4, 2024).

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